The New Zealand Initiative welcomes the Government’s commitment to social bonds, and believes the mental health sector is a good area to test the potential for the model.

In fact, The Initiative said as much when the government first announced a similar social bond nearly two years ago.

“While we were disappointed that the first social bond collapsed, we still consider the mental health sector a good area for a social bond. Successive governments have neglected to improve the outcomes of those with mental illnesses who need extra help getting into work. It is time to tap into private sector expertise to solve the kinds of social problems that governments have struggled with,” says policy analyst Jenesa Jeram.

“The social bonds model needs to be given enough rope either to swing into success, or fail. As we’ve seen, it is all too easy for the model to be jeopardised by bureaucratic inertia.

Hopefully, with a newly dedicated Minster for Social Investment, we will see the Government indicating a renewed priority to test new ways of funding and delivering social services.”

While the Initiative supports the social bonds model’s potential (remember, the ability to fail is part of the model), we’ve also been wary of the many external reasons social bonds might fail. Bureaucratic inertia is the most pressing concern. No matter how much potential social bonds has for both harnessing private sector expertise in social services, and harnessing private funding, the model still needs a champion within the public sector. So before we get too ahead of ourselves, it is important to look back and consider why the first social bond failed.

A bit of context: the social bond announced today is not the government’s “first” social bond, it is the first social bond to be “operational”. The real first social bond never made it to that stage, it collapsed during negotiations.

I’m really glad The Treasury has released the following document: ‘Social Bonds Pilot Procurement: Lessons Learned Review’. One of the purposes of the social bonds pilot is to learn broader lessons for other forms of performance based/outcomes based contracting, so this assessment is really valuable.

All in all, the lessons learned were:

While the procurement process itself has been well run, a lack of commercial financial expertise within the pilot team has led to a heavy focus on process diligence as opposed to achieving a successful process outcome.

A lack of ongoing visible senior sponsorship within agencies for the pilot programme.

That clearer basic commercial and financial parameters upon which the Crown would be willing to contract would have provided greater certainty and confidence to the market.

The requirement to undertake a market-led process has added time and complexity to the procurement process, as well as a loss in negotiation power for the Crown.

Investors should have been better included in all parts of the procurement process in order to understand what potential issues/concerns they might have about things like risk allocation and financial return. There should have been more up-front interaction with the market with respect to the intermediary role.

That the lack of real-time decision-makers for the Crown at the negotiation table was suboptimal in terms of running a commercial transaction procurement process efficiently and effectively.

In a nutshell, the model faced many bureaucratic challenges, and there was also a communications challenge in getting investors on board. In all honesty, I understand the communications challenge. Speaking at the NZ Responsible Investment Conference in 2016 on social bonds, while I think the case for government involvement, social service provider involvement, and the potential for achieving superior outcomes for vulnerable populations is clear, making the case to investors was difficult. There still wasn’t a lot of information out there about how the NZ government would deal with risk allocation and likely financial returns.

Hopefully, the newly appointed Minister for Social Investment, Amy Adams, indicates a renewed focus on innovative social service programmes like social bonds. While social bonds is one way of raising private sector funding for social services, and contracting for outcomes, the lessons and challenges will be applicable for many similar models. As the Initiative has said from the start, these programmes have real potential for transforming the way social services are delivered, and ensuring they really are serving the populations they are supposed to.

The ability to learn from past mistakes is important. Having a dedicated champion for these models is important. And it’s important that government continues to find solutions for some of society’s toughest and most seemingly intractable social problems.

Oh, and one side note: for those wringing their hands aboutthe idea that the Government will be offering additional support to help those suffering mental illnesses get into employment….you do realise the Government has been doing something similar since 2014, right? The difference is that the social bonds model is much better suited to measuring and rewarding long-term outcomes. In a social bonds model, it is in the service provider’s best interests to ensure long-term, sustainable and fulfilling work for the people they serve.

Sorry, we’ve been writing about social bonds since 2015, so I’ve become lazy with describing the concept/giving the background detail. Yup, it’ll attract philanthropists as an alternative form of charitable giving. I’d be surprised if it were attracting investors who were just out for a profit: the model is rather risky and unproven.